· To learn how is zakah calculated on stocks, shares, and 401k.
· To understand the eight categories of people who can receive zakah.
· To learn some practical tips on how to pay zakah.
· Zakah - obligatory charity.
· Sadaqah - voluntary charity.
· Jihad - a struggle, to exert effort in a certain matter, and may refer to a legitimate war.
Zakah on Stocks, Shares, & 401K
Zakah is calculated at a standard rate of 2.5% of total portfolio value at the zakah due date because they are bought with expectation of profit, and readily traded for money.
Short-term traders should estimate stock values on an established annual zakah due date, regardless of stock purchase dates or value fluctuations, and pay 2.5% of total portfolio value.
It seems best to consider all accounts - 401(k), Keogh, IRA, SEP-IRA, Roth IRA, etc. - as zakatable at the rate of 2.5% annually. Usually not all the money is accessible to the investor for withdrawal, up to 50% normally being allowed. Therefore, the following formula is suggested by some scholars:
Withdrawal Amount - Prescribed Penalty - Prescribed Tax = Zakatable Amount
Who Can Receive Zakah?
The Quran tells us who is entitled to receive zakah. The eight categories are found in the Quran in Chapter at-Tawbah, 9:60:
1. The Poor
Poor people who do not have sufficient money to meet their needs are qualified to receive zakah. It does not mean they are penniless, but cannot make their ends meet, yet they do not ask others for help out of modesty and a sense of self-respect.
2. The Destitute
These are people who are so poor that they have nothing to meet their needs. Obviously, they are in worse condition than the first category.
3. Zakah Administrators
People responsible for collecting and distributing zakah could be paid for their work from zakah funds. They can receive wages whether they are poor or not.
4. Reconcile Hearts
People who have recently accepted Islam can be given zakah. People can also be given money from zakah to seek their support or to prevent their opposition.
5. Freeing Slaves
In the past, zakah money was also used to buy slaves their freedom. The Quran has legislated it to be one of the legitimate ways to spend the money from zakah. It is a clear expression of the compassion of Islam towards treatment of slaves when they existed. Islam raised freeing slaves to an act of worship pleasing to God. No other religion has ever done that as far as this author is aware of.
6. Paying Debts
People who are overburdened with debt and do not have a way to pay on their own can also receive zakah funds. The debt can be due to medical reasons, marriage, or other lawful expenses.
7. Cause of Allah
Wealth can also be spent in the cause of Allah. The traditional understanding held by the classical scholars of Islam is that this category is reserved for jihad or a legitimate war. Later scholars have included efforts for the spread and ideological defense of Islam in this category as well.
People used to get stranded in the past while traveling with no access to their funds back home. It happens sometimes today as well. In such situations, those travelers may be given money from zakah. The condition is that their journey should not be in disobedience of Allah, but for an acceptable cause like seeking knowledge, looking for a job, or doing business.
Who Can Not Receive Zakah?
A wealthy person cannot give zakah to his or her parents because they are the child’s responsibility. Also, a husband cannot give zakah to his wife as she is his financial responsibility. Furthermore, a non-Muslim cannot be given zakah according to the majority of scholars. Poor non-Muslims can be helped with sadaqah or voluntary charity.
Practical Tips on Giving Zakah
1. You can give money to a poor and needy Muslims directly if you know them.
2. Your local Islamic center most likely collects zakah and distributes it to the needy of the local community or works with a charitable organization. Therefore, you can always ask the local mosque if they accept zakah. You might even find boxes labeled “zakah” in the mosque in which you can simply drop your check or cash for zakah.
3. Furthermore, you can search online and find numerous Islamic charitable organization that collect zakah to sponsor orphans or distribute food or medicine in disaster-struck areas.
The following are just some of the organizations you can give your zakah to:
Zakah is to be paid on gold and silver jewelry. The zakah on the gold will be calculated according to the gold content in the jewelry (i.e. karats) and its value in the market. Hence when calculating the value of your gold, you must consult a jeweler for the correct value (based on the content and weight). Any stones in the jewelry are not subject to zakah.
You must have the intention to pay zakah when you give it out. In other words, you cannot give money in donation, then later think to yourself, ‘well, I have given so much in charity already, it will count as my zakah!’
Zakah must be paid immediately once it is due. It should not be delayed unless there is a good reason to do so, like waiting to have access to the poor.
A very common and widespread misunderstanding is that once I have paid zakah on some wealth, I do not have to pay zakah on the same wealth next year. That is baseless. In reality, as long as I have wealth above the nisaab, and a complete lunar year has passed on it, I will keep paying zakah on it every year.